Appointment of external auditor

Traditionally, most private companies in the country hold their annual stockholders’ meeting (ASM) in March, April or May.

It’s an annual ritual the law requires all corporations, both stock and nonstock, to observe in accordance with the procedures provided for in their bylaws.

For listed companies, the ASM is carefully choreographed because the presentations and statements made by their executives, including the resolutions approved, during the event would be closely looked at by their stockholders and, most importantly, by prospective investors.

Prior to adjournment, the last item in their ASM’s agenda is often the nomination and selection of an external auditor (EA) for the fiscal year.

The choice of EA is significant because, as a rule, the government offices that exercise regulatory authority over their operation require their financial statements and other related filings to be signed or endorsed by an EA.

The EA is meant to be an outside party that objectively examines the books of a company and determines its compliance with applicable accounting rules and standards.

If it does, the EA’s imprimatur is supposedly something that can be taken to the bank.

The price catch of any audit firm is to bag the audit contract of the parent or holding company of a business conglomerate because that appointment usually includes the latter’s subsidiaries, affiliates and side businesses.

The arrangement makes good business sense because it ensures that all the members of the conglomerate are governed by and follow only one set of accounting procedures.

For the lucky audit firm, that could mean millions of pesos in fees and charges for the services it may be asked to render. What’s more, the engagement may open the door for audit business from other companies.

Thus, it is big news (or gossip) in the business circles if listed companies that are considered the bluest of blue chips are reported to be on the verge of replacing their decades-long EAs.

During those years, the key officers of the EAs and their client-companies would have built strong personal and professional relations.

To maintain the EA’s grip on their clients, it is not uncommon for EAs to encourage their “least productive” staff or retirees to seek employment with their clients and the latter often take them in because they don’t have to go through an extensive learning curve.

Given these considerations, there has to be very strong or compelling reasons for a company to change EAs and go back to square one in establishing professional ties with a new EA.

Historically, for reasons of confidentiality and friendship, the real reasons behind the breakup of any auditor-client relationship are not publicly disclosed by any of the parties.

The split is often described as cordial or by mutual agreement. The parties refrain from making recriminatory statements because that is a big no-no in the country’s tightly-knit business community.

Going by the experience in the United States, some companies replaced their audit firms for breach of trust and confidence, e.g., failure to strictly observe the sanctity of the proverbial “China Wall” between clients with related or competing businesses.

Another instance of that breach is when an EA’s staff engaged in the short-selling or inside trading of the stocks of a client company based on the latter’s confidential or still publicly undisclosed information.

In some cases, the substitution of EAs is done to save the neck of the company’s executives when its financial statements are found to have been falsified or violated regulatory standards.

The company would wash its hands of the offense and claim that it acted upon the advice or instructions of the EA.

In consideration for the payment of newly discovered unreimbursed expenses and unpaid accounting fees, the EA agrees to be the scapegoat to get the executives off the hook.

Whether these cases apply to the earlier mentioned listed companies and their imperiled audit firms is a big question mark. INQFor comments, please send your email

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